CPI Inflation Eases To Four-Month Low In August

Retail inflation declined in August, led by a fall in vegetable prices compared to a year ago.

<div class="paragraphs"><p>Roadside vendors sell vegetable in Bengaluru, India, on Monday, June 21, 2021.  Photographer: Dhiraj Singh/Bloomberg</p></div>
Roadside vendors sell vegetable in Bengaluru, India, on Monday, June 21, 2021. Photographer: Dhiraj Singh/Bloomberg

Retail inflation declined in August, led by lower prices across a number of food items.

Consumer Price Index inflation stood at 5.3% in August 2021 compared with 5.59% in July, according to data released by the Ministry of Statistics and Program Implementation on Monday.

Inflation in food and beverages fell to 3.8% from 4.5% in July. Core inflation too eased to 5.89% in August, compared to 6% in July, according to Bloomberg.

A Bloomberg poll of 32 economists had estimated inflation at 5.6% for August 2021.

Strong base effect resulted in the decline in retail inflation. It is seventh consecutive month of retail inflation remaining in excess of 5% and 23rd consecutive month of retail inflation remaining in excess of RBI’s targeted inflation rate of 4%.
Sunil Kumar Sinha, Principal Economist, India Ratings & Research

Inflation Internals

  • Inflation in oils and fats was at 33% on an annual basis compared with 32.5% in July 2021.

  • Inflation in the pulses category was at 8.8% compared with 9% last month.

  • Vegetables saw disinflation, with prices falling 11.7% compared with a fall of 7.75% in the preceding month.

  • Clothing and footwear inflation was at 6.8% compared with 6.5% last month.

  • Housing inflation stood at 3.9%, unchanged compared with the previous month.

  • Fuel and light inflation stood at 12.95% in August compared with 12.4% last month.

  • Inflation in transport and communication was at 10.2% in August compared with 10.5% in July.

Food Price Drop Leads Inflation Lower

Inflation in food and beverages declined to the lowest since April this year.

The cooling of food and beverages inflation to 3.8% in August was the chief driver behind the moderation in the CPI, said Aditi Nayar, chief economist at ICRA. In month-on-month terms, the food and beverages basket remained flat.

Radhika Rao, economist at DBS Bank, also said that inflation decelerated on the back of favourable base effects and moderate food price pressures, as most sub-segments trended lower, barring oil and fats. Most non-food categories also eased month-on-month, barring clothing and footwear, alongside housing, she said.

Although monsoon rainfall were lower in August 2021 it did not impact the cereals inflation adversely, said Sinha. On the contrary, cereals witnessed seventh consecutive month of deflation.

However, low agriculture productivity and deflation in cereals prices may impact the rural income and in turn the rural demand, Sinha cautioned.

Late kharif sowing has helped narrow the gap with last year's acreage, with coarse cereals, oilseeds and cotton continuing to record a decline in prices on an annual basis, said Nayar.

Despite the recent abundant rainfall, reservoir levels on Sept. 9, 2021 were substantially lower than the corresponding level of 2020 and 2019. This suggests a cautious outlook for rabi sowing, unless rains remain strong in the rest of this month, which would be counterproductive for the kharif harvest, Nayar said.

Breather For MPC

Lower headline inflation and stable, albeit elevated core inflation, will come as a relief for the MPC.

While favourable base effects are expected to soften inflation readings to sub-5% in the next quarter, on a sequential basis, pressures remain due to the domestic fuel tax rigidity, service sector reopening and pass-through of higher input costs, said Rao.

Besides prices are still rising in a number of categories. Non-food retail inflation increased to 6.8% in August 2021 from 6.7% in July 2021, Sinha said.

Still, the softer inflation will provide room to move much slower in terms of policy normalization, said Upasna Bhardwaj, senior economist at Kotak Mahindra Bank.

The Monetary Policy Committee, led by Governor Shaktikanta Das has continued to term high inflation as 'transient,' choosing instead to focus on reviving and sustaining growth on a durable basis. Das, in recent comments, has also suggested that the committee is looking to keep inflation within the 2-6% band rather than immediately target the mid-point of 4%.

Policy normalisation could commence in February 2022, with a change in the stance of monetary policy to neutral from accommodative, followed by a hike in the repo rate of 25 basis points each in the April 2022 and June 2022 meetings, Nayar said.